Saf-Holland Se

XETRA:SFQ

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Saf-Holland Conference Call. [Operator Instructions] Let me now turn the floor over to your host, Stephan Haas.

[Stephan Haas]

Good morning, ladies and gentlemen. This is Stephan Haas speaking from the Investor Relations department. I'd like to welcome you to today's call, which will be on the preliminaries, exclusively. We will publish the full figures, which includes segment information, cash flow and balance sheet on March 16 at the occasion of the analyst and investors conference in Frankfurt, and unfortunately, we will have to excuse Dr. Heiden, who's another victim of the flu pandemic, which we are facing here in Frankfurt. So Mr. Borghardt will do the conference call on his own today. And as always, the session will be followed by a Q&A, so if you have any questions afterwards, please feel free to address them. Thank you.

[Detlef Borghardt, CEO, President of Region Asia]

Hello, Stephan. Thanks a lot for the introduction. Also from my side, a warm welcome and very good morning. This is Detlef Borghardt. Okay, so I will run through the presentation by my own, as Stephan said already, Matthias is excused, and to gain time, I will jump right into the presentation, starting with the agenda on Page #2. This is 5 bullet points. I will start with the business summary for our financial year 2017. This will be the following 3 pages, then I will talk about the status quo of our U.S. plant consolidation, as one of the most important items in our financial year 2017. I will talk about the preliminary key financial figures for the last year, 2017, and especially on Q4 2017. This will be followed by the update of our company outlook. And last but not least, I would like to talk about our action plan, "MAP" AMERICAS, what is behind that, you will hear a little bit later. Yes, on Page #4, you see the first page of our business summary. Here, I would like to talk about the sales in 2017 and, as you can see on the headline, we overachieved our targets here. First bullet point, I would like to talk a little bit different here. We did last year -- our total sale grew to EUR 1,138.9 million, which was an increase of 9.3% compared with the year 2016. And this was based on a very solid increase in Europe and extremely dynamic sales growth in China and parts of APAC. And this is most important, we really saw a soaring customer demand from the U.S. for both truck and trailer industry, and that came in at exactly the wrong moment, I will talk about that more in detail later on. Second bullet point, we saw some negative FX effects of EUR 9.1 million in sales contribution, but this has been balanced out by the sales with our Brazilian company, which we took over in September 2016, KLL, which came in with EUR 9.2 million. Organic sales of EUR 1,138.8 million topped our upward guidance. We started the year with a planned figure of EUR 1.09 billion. We increased it in October to EUR 1.125 billion to EUR 1.135 billion. And as I said, we came out now with EUR 1,138.8 billion (sic) [ million ], which is a very nice achievement. In Q4, our sales momentum continued in all regions, having sales increase by 8.6% to reach EUR 274.2 million compared with EUR 252 million in the previous year. In the period October through December 2017, FX came in at EUR 11.4 million negative. Organic sales growth without the FX effect, we saw a double-digit growth of more than 13%, which is also very clear showing how dynamic the markets are in these days. Yes, on Page #5, I would like to talk about the profitability, the adjusted EBIT margin development. We in -- so in the financial year 2017 -- and adjusted EBIT increased moderately to EUR 91.2 million. Previous year was EUR 90.4 million. As expected, our adjusted EBIT margin came in at 8%. Last year or the previous year was 8.7%. And with the 8%, we came in at the lower end of the 8% to 9% range, which we said earlier. The 8% was mainly due to the swift increase of the demand of U.S. truck and trailer customers, and that came in as we right -- that came right in the middle of our grand consolidation in U.S. But we have seen further negative impact, especially in North America. We have a negative impact from steel price increase and an unfavorable product mix. As you know -- or most of you know, in these days when markets are growing very fast, most of the customers would like to get standard trucks and standard trailers, also with standard components like very standardized fifth wheels, for example, our very standardized axle and suspensions, and this came normally in with lower margins. So this is the main reason for an unfavorable product mix, plus -- and I will talk about that later and more in detail. We didn't serve our aftermarket's customers with spare parts, as we usually do, and also this is then, of course, a negative effect in the mix, because aftermarket products come in -- always come in with a much higher margin than OE products. The negative steel price impact, by the way, was not only in U.S., we see that globally but U.S. extremely. And, as I said, this is -- was one of the burden reasons. We had some, of course, significant impact on earnings from the implementation of our U.S. plant consolidation. Again, I will talk a bit later on more in detail. Here are some numbers. We saw EUR 10.9 million of a total of EUR 13 million in onetime restructuring costs related to this plant consolidation, and that was mainly relocation costs, impairment of tools and some equipment, and severance payments that were adjusted for. The next point is EUR 10.3 million burden from unplanned additional costs, which came in with U.S. plant consolidation and which were fully accounted for in the EBIT. So the reported EBIT then, we achieved approximately EUR 72.7 million compared with EUR 78.4 million in the previous year. On the next page, Page 6, I would like to talk more about Q4, the last quarter in 2017. First bullet point here, we saw a significant negative impact on earnings from the U.S. plant consolidation because -- and that was one of the main reasons. The OE sales picked up by 13.7%. You will see later on a very nice graph where you see that more in detail, so we can see what happened in the last quarters -- or in the quarters in 2017, especially in Q4. And increase of 13.7% is something really difficult to manage when you are starting new fabrications or new production in some new plants. So in Q4, we saw EUR 1.6 million out of total EUR 1.7 million in onetime restructuring costs related to the plant consolidation that was mainly relocation costs, impairment of tools, as I said earlier, for the full year. And all this has been adjusted positively in the adjusted EBIT. Again, U.S. only was EUR 1.6 million. We saw EUR 6.3 million burden in Q4 from higher operating cost related to the final phase of U.S. plant consolidation, which were booked into the EBIT. The adjusted EBIT in the America regions posted net loss of EUR 3.9 million in Q4 only. Also on this, you will see later on a bridge to see what happened in Q4 2016 compared with Q4 2017. The good thing is -- the good news is, compensated partly by very strong earnings in Europe and China. In Europe, we had a very nice effect that, at the end of last year -- in December last -- end of December, some bonus kicked in from our main suppliers here in Europe. This bonus are volume-related. And due to the very high volume we did in Europe last year, we saw in total EUR 4.5 million -- approximately EUR 4.5 million as positive purchasing effects as a onetime effect. But of course, it helped to compensate the losses in North America. Overall, in Q4, the 2017 group adjusted EBIT achieved EUR 18.5 million compared with EUR 19.8 million in the year before, taking the adjusted EBIT margin to 6.7% compared with 7.8% in the previous year. Yes. This is the summary about earnings and sales in 2017 and in Q4 2017. I would like to go on with the status quo of our U.S. plant consolidation, as you heard already in many bullet points here what happened there. On Page #8, you see just as a reminder, what we did last year. We had 7 factories in U.S., plus we have 1 factory in Canada, but this is not involved. And out of the 7, we closed 2 and moved all the equipment, all the machinery, all tools, everything from the plants in Muskegon and Holland, both located in West Michigan to Cincinnati, Dumas, Wylie and Warrenton, that means Missouri, Texas, Arkansas and Ohio. As you can see on the box down there, in 2017, we have seen EUR 9.9 million -- EUR 10.9 million, sorry, restructuring charges which we adjusted for related directly to this plant consolidation. On the next page, Page #9, you see an overview where are we. As you can see -- so Holland plant was closed end of September on time. And the Muskegon plant was closed end of December also on time. So these are the good news here. Now in 2018, we are working hard to enhance our profitability. How we're doing that? Reduction of our startup cost in the new plant network, and this is key, realignment of all planning and logistic processes, and of course, with this, wipeout all production inefficiencies to come back to the old, let's say, good profitable level as we have seen in the past. As I said, both Michigan plants transitioned to Southwest until end of December. And the focus is with overcoming the startup phase production and to -- yes, to serve our customers on time and, obviously, right volume. Although in these markets, with the higher order intake, this is really a challenge. On the last page later on, I will talk about "MAP", our management activities in North America, more in detail, so you will learn about this at the end of this presentation. On Page 11, I would like to start -- show you the bridge, how we came from sales in 20 -- in the financial year 2016 to 2017. Organic growth, this is the gray bar you see on the left. We realized EUR 96.8 million in sales. We have a negative FX effect of EUR 9.1 million, but as I said earlier, these have been balanced out with the sales of KLL in Brazil, our acquisition which we did in September 2016, which is EUR 9.2 million. On the next page, which is Page 12, you'll see the same, but only for Q4. And as you can see, we have a sustained strong organic growth of plus 13.1%. It means organic growth in Q4 only came in with EUR 33 million. Unfortunately, we had FX effects of EUR 11.4 million. So the total sales in Q4 was EUR 274.2 million. So on Page #13, I would like to build on a little bit more into the development quarter-by-quarter. And we believe this is a very nice overview, so you can follow our sales trend, our sales development in 2017. On the left-hand side, you'll see the growth quarter-by-quarter in EMEA/I, so Europe, Middle East, Africa and India. It was a very start -- very good start in Q1. It was 9.9%, followed by 4.3%, 8.6% and also in Q4, we did 8.1% higher sales than in Q4 2016. Before I come to the Americas, I would like to jump to the right, to the sales development in APAC and China. And here, you can see we started the year already quite good, with 26% higher sales in Q1 compared with 2016, followed by 41%, 35% in Q2 and Q3, (sic) [ respectively ]. And then in Q4, you see amazing 52.9% increase, which is the highest increase by quarter we have ever seen in this region. And this is, of course, based on very good contracts we signed over the course of last year, increasing of production, mainly on the trailer side for axles and suspensions, and all of them -- all of that was premium products. We managed it somehow. We didn't manage that very well in Americas. And with this, I would like to come to the middle of the chart. You can see -- and that is exactly what we said over the quarters we reported on last year. First year -- first quarter, Q1 2017, came in with just 1.6%, so more or less the same sales than in 2016. Moderate growth in the Q2 and Q3, only 5.4%, 6.4%, (sic) [ respectively ], so much, much lower than the other regions. But then Q3, 11% growth compared with Q3, and that was right, as I said, after we closed our facility in Holland and going to close our facility in Muskegon. And then in Q4, and you see the blue bar here, this is the growth of our OE business only, so we see truck and trailer producers in U.S. only. And here, you can see the already mentioned 13.7% increase, which was really difficult to manage. Yes, we believe that helps to understand what happened in -- over the course of last year, especially in Q4 in all regions of the world. On the next page, Page 14, I show you the bridge coming from sales in 2017 of EUR 1,138.9 million to the gross profit. In total, you'll see cost of sales of EUR 933.8 million, additional operating cost of EUR 10.3 million and restructuring cost for the U.S. of EUR 10.9 million. So the gross profit came in with EUR 205.1 million. On your right-hand side, you'll see some impacts on the gross margins in the financial year 2017. Unfortunately, a lot of red minus. We had too many temporary workforce on board. Volume, yes, you see a green plus. Absolutely, to have nice increase in volume is always good, but as I said already, if that comes in right in the middle of a plant consolidation, then, of course, you see a minus there, a red minus. Steel price, I talked about it, absolutely, the burden last year. So we are always, since now for 1.5 -- more than a year, almost 1.5 years, we are running behind to increase prices with our customers, which we can do, which is contractually given. But as I said, we are always behind, because steel prices are increasing even more, and we don't see an end on this. We will see what will happen over 2018 with steel prices. So far we don't see an end to the increase. Segment mix, as I said also, not very positive, because we didn't serve our aftermarket customers very well in the U.S. This is going to change now. Of course, restructuring cost is negative, exchange rate, as I said, and operating efficiencies. Here, I can say, in Europe it was quite variable, plus in China, quite good, so we see a very clear green here, green plus. But, of course, in U.S., it was quite negative, so therefore, you see the red minus here. On the next page, on Page 15, I would like to talk about the gross profit in Q4 only. Q4 sales came in as -- with EUR 274 million. The cost of sales in total was -- have been EUR 227 million. Additional operating cost in Q4 only had been EUR 6.3 million and the restructuring cost, EUR 1.6 million. So gross profit came in with EUR 46.4 million, and I have to say only. This was definitely not what we expected for. But that's -- you can see here on the first entrance here, in Q4 2016, we did 19.2% gross profit -- across margin, sorry. And now in 2017, 16.9% only. As I said, we had some volume-related positive purchasing effect in Europe of approximately EUR 4 million, what helped, which came in end of December and very nice development in APAC and China, not only on the sales side, but also on the profitability side. We will report on that more in detail, as Stephan said earlier, middle of March, at the 16th of March, when we present the numbers for 2017 in total. Yes, the next page, Page 16, very short bridge -- short explanation about the bridge coming from reported EBIT to adjusted EBIT. And depreciation and PPA was EUR 5.3 million. Restructuring cost, as I said already, EUR 13.2 million. So adjusted EBIT was EUR 91.2 million. The adjustment was -- in large part, were related to the U.S. plant consolidation, so it was EUR 10.9 million only for the U.S. On the next page, Page 17, the same for Q4. So not for the full year or full financial year 2017. Reporting -- Reported EBIT, EUR 15.5 million. PPA, depreciation and restructuring costs, that brings then to the adjusted EBIT of EUR 18.5 million. Including the restructuring and transaction cost totaling of EUR 1.7 million and PPA, EUR 1.3 million as adjusted. The adjustment in Q4 for the U.S. only was EUR 1.6 million. Yes, and coming to Americas, even more in detail, this is what you can see on Page 18. You'll see the development, the bridge, how we come from adjusted EBIT 2016 in Q4 to 2017. You see -- and here, we are very transparent that in total, we had add-on operating expense of EUR 6.3 million. The compensation payments are EUR 1.1 million. Also this kicked in end of December last year, so it wasn't really foreseeable. This was mainly to payments we did for customers for late deliveries or not on time deliveries. We started -- or we fight it hard to level this -- to lower this number, but finally that was the outcome, and that's something we booked in end of December, unfortunately. Something we normally don't do, but of course, if we don't deliver on time, then according to some contracts with OEs, then you need to pay for it. We have expedited freight in Q4 only of EUR 2.3 million, so that means last-time deliveries by express deliveries, air freight, et cetera. We had increased subcontracting, so bring in additional people, et cetera, to be faster, that cost us EUR 1 million. We had plant inefficiencies of EUR 1.9 million. And there's impact called mix and other of minus EUR 3.3 million. This is mainly the steel price and the mix effect. That means the aftermarket customers, as I said, we didn't really deliver properly. So, of course, there was a higher mix than with OE customers, and that, of course, was not good for the overall margin. So this explains the minus EUR 3.3 million. In total, adjusted EBIT Q4 in U.S., a disappointing EUR 3.9 million negative compared to EUR 5.7 million in 2016, in Q4. Yes, what are we doing to turn the tide here? This is on the next page, which is Page 20, the -- our so-called Management Action Plan, "MAP" AMERICAS. A couple of bullet points, and I would like to guide you through that. First one, we refined our selective organization elements to further strengthen customer focus, includes some SG&A optimization, that means we reorganized our sales activities in North America. We streamlined it significantly, and that was already done last month in January 2018. We do it with -- we did and do a realignment of planning and procurement and logistic processes. And, of course, we need to continue to invest in IT infrastructure, which is, let's say, really important, and due to the plant consolidation, we need to do that. That means also we are going to reorganize the logistic processes within the different factories, exchanging some people, et cetera. That all leads -- of course, will lead to reduction of startup costs in the new plant network and that, of course, and this is the main point here, wipe out the production inefficiency due to translation of plant consolidation efforts into sustainable, and this is the keyword here, sustainable operational excellence in the receiving plants. We are having a bunch of people over there helping our colleagues in the U.S., plus we have some external people there on board to speed the process up and to get it extremely fast under control. So as I said, to turn the tide here and come back to the old profitability, which we had in North America prior to the plant consolidation. Of course, we need to reduce the backlog of our aftermarket spare part demand for our customers, and we are doing that already. And last but not least, and this is really a very positive point here, we have some additional focus on go-to-market activities in Latin America. I just come back from Brazil last week. I've seen a couple of big customers there, and that looks quite good. Most of the customers, probably all of them, had a very good start in this year in January. And so it looks really -- it looks like that, especially Brazil, is on the very positive trend here, and we see -- we will see double-digit growth in almost all segments in Brazil by our customers. And of course, we will follow this with our very good position with KLL in the South of Brazil. Yes, this is a -- very briefly about our management action plan in Americas. And with this, I would like to come to the, more or less, last slides here. On 22, our outlook for the year 2018 and mid-term planning 2020. To start with the mid-term planning 2020. First, there's no change on that, absolutely not. We stick absolute to our strategy. That means organically, we will grow the company until end of 2020 to EUR 1.25 [ million ], and you will see later on a chart which shows this that we are on a very good way to achieve this, and regarding M&A, this should add another EUR 250 million in sales. So in total, we will do end of 2020 EUR 1.5 billion in sales. The adjusted EBIT margin in 2020 will be more than 8%. The net working capital around 12%, and the CapEx between EUR 26 million and EUR 28 million. With this, I just go to the left-hand side of the slide, what is the -- what are the targets for the financial year 2018. Starting with the CapEx, this will be higher than normally. You see the number here between EUR 38 million and EUR 40 million, which is significantly higher than the normal -- in the normal years. As you know, we do normally 2% to 3% -- 2% to 2.5% on CapEx. This year, we'll be higher. This is mainly to a significant investment, our new factory in China, which we will build starting right now, in the next couple of weeks, right after Chinese New Year, and this will go into production in one year from now, at the latest. So -- and this will be a high single-digit euro amount to invest in China to fulfill the demands which we see from Chinese truck and trailer customers, and therefore, we need this additional capacity and a state-of-the-art production in China. Net working capital ratio will be at the same 12%. Adjusted EBIT margin, we see this year between 8% and 8.5%. And coming to the sales number, we see an organic increase -- sales increase to -- of 4% to 5%, plus some potential M&A activities, which we will see this year. Of course, this is assuming stable FX rates and an unchanged scope of consolidation. On the next Page 23, which is the last page of this -- today's presentation. The overview how -- about the sales development of our company from 2010 on. In 2010, we did EUR 331 million (sic) [ EUR 631 million ] in sales, and as I said, on the previous slide, of the target organically until 2020, end of 2020, is EUR 1.25 million -- EUR 1.25 billion. And as you can see, in 2016, we did EUR 1.42 billion. In 2017, EUR 1,139 million. And then as I just said, the outlook for 2018 is between EUR 1.184 [ million ] and EUR 1.196 [ million ]. So already pretty close to the EUR 1.25 [ million ] in 2020. And with this, I believe we are really well on track to meet our strategic targets for 2020. Yes, with this, I'm at the end of the presentation of today. And I believe, Stephan, we are open for questions now.

[Stephan Haas]

Yes, please go ahead.

[Operator]

[Operator Instructions] And there's a first question from Alexander Wahl from Warburg.

[Alexander Wahl, Stock Analyst]

First one on your margin outlook. If I add back the EUR 10.3 million in cost overruns and subtract the EUR 4.5 million positive effect from purchasing effects in Q4, I think your clean adjusted EBIT would have -- EBIT margin would have been around 8.5%, and now you guide for 8% to 8.5% for 2018. So it appears that, in your best case, you expect efficiency gains from plant consolidation in 2018, basically, to be offset -- or completely be offset by continued cost overruns. So could you just elaborate a little bit on what is the reasonable magnitude of additional cost to be expected in 2018, and what additional negative effects are baked into that forecast?

[Detlef Borghardt, CEO, President of Region Asia]

Yes, thanks for your question. Yes, of course, there are -- we are in January, February now, okay, and it's a little bit too early to see what will really happen this year, but we definitely will see -- and I said that already, we have a problem with steel price. This is something we -- which is not in our control. We don't do any action here, so that means we are always behind with price increases to our customers, especially to the large OEMs in Europe. And in Europe, we are doing that, as you know, we always do that. We did that for decades now, but this is an effect which we don't know. So this is something we will see over the course of the year. Then, of course, the margin of improvement in U.S., we will see gradually quarter-by-quarter. As we said, we are still working on the plant consolidation to make the factories more efficiency, but you will definitely see in the second half of the year an increase in the margin. Second half of the year, we definitely -- especially in the U.S., definitely better than the first half. So we see -- we expect an absolute gradual improvement quarter-by-quarter. And so yes, but there are some -- as I said, some things which are not on our control right now.

[Alexander Wahl, Stock Analyst]

Okay. And a second question on your sales assumption. Maybe you can also elaborate a little bit on how you see the European trailer market and the U.S. trailer market evolve and how you see your business develop in comparison to the overall market development in these 2 locations.

[Detlef Borghardt, CEO, President of Region Asia]

Yes. Starting this year, -- that's a good question, that's a very good question, because this is, of course, one of the most important points for us. We are more a trailer company than a truck company, 60% of our sales is trailer-related. Europe is still strong. I have to say it's still because we see now a year -- almost in year 3, almost 4 year -- 4 now and a continuing high level of trailer production. Positively to see is Russia came back last year strongly. So that helps, of course, but all the other markets in Europe are strong except 2, which is U.K. We see first, yes, I believe, results of the Brexit. We see some lower numbers here, and we see also Turkey is still not in a very healthy position here. Overall, there is one market outlook available from company CLEAR, and he's talking about minus 5% in Europe on trailer production this year. So far, we don't see that. So far, it's very stable on a high -- a very high level, and we still don't see any kind of weaknesses so far. As I said, we'll need to see if Mr. Beecroft from CLEAR is right with the minus 5%. But if something would come up in this direction, then it would be probably in second half of the year, we will see. So again, so far, Europe is on a very good -- very high level, and we so don't see any weakness also in our order intake, which is good. In North America, that was the other question, yes, the market is booming. We saw in January, an all-time -- not an all-time, but a very high order intake, I believe, roughly 40,000 trailers, which is now the 3 months in a row, which we have never seen so far in the North American trailer market. All the customers are very positive, so U.S. is strong. Mexico is still not very good, but okay, we will see. And Canada is also quite okay. So overall, when you look to the forecast from FTR and SCT -- and ACT on the truck market, they talking about a [ plus/minus 2% ] on the trailer side, which is okay, which is good. And on the truck -- sorry, on the trailer -- that was trailer. And on the truck, all market forecast talking about plus 22%, plus 24% increase, which is, of course, fantastic. If this come in, then it will be a extremely good year. And so far we see that also in our order intake. So that was the second part of your question, how we see our position in Europe, strong. We are -- although we are #1 or #2 now, that depends, but I believe we still gained some market shares, especially with smaller customers. And in U.S., yes, we will see. I believe we are in a very good position. We see the disc brake is coming more and more, they request on fleet, and this is the main driver here. As we can see, it's getting bigger and bigger, and we might see some positive effects on that in the next couple of months and also our system approach, it means higher content per vehicles also on the good way. So all this is still as planned, and I'm quite positive with this.

[Operator]

Next question comes from Christian Ludwig from Bankhaus Lampe.

[Christian Ludwig, Analyst]

I have a couple of questions [ in my head ] but first, basically, a follow-up on the U.S. You gave us a very detailed breakdown of the additional cost you had to deal with in Q4. If you look into 2018, especially Q1, Q2, how many of these costs you think will still stick? I mean, you gave us the breakdown, compensation payments, expedited freight, subcontracting, et cetera. Just to get a feeling how much we need to calculate here, what's going to burden the results, at least, in the first half of the year? And the second question would be, very quickly, on the disc brake situation in the U.S., I think you released 2 orders that you got in the last 2 years. Could you give us an update there, how many more orders you have received? And the last question is on China. Could you give us a little bit more color on what kind of growth expectations you have there? You mentioned you're building a new plant. When will that be operational? When will that deliver to revenues?

[Detlef Borghardt, CEO, President of Region Asia]

Yes, Mr. Ludwig. Thanks for your questions. Let me start with the last one, China, because I was 2 weeks ago in China. Last week, I was in Brazil, 2 weeks ago in China. I signed a contract with the local government in Yangzhou. Yangzhou is roughly 1.5 hours from Nanjing. It's, let's say, something to you of roughly 4 hours from Shanghai to the -- was in the West of China. Yangzhou is a very well-located place for truck and trailer companies. There's a kind of a cluster, and it's actually in this area we will build this new factory. Again, the contract was signed 2 weeks ago. We will start with, yes, the -- yes, with the building in 2 weeks, 3 -- no, let me say, in 4 weeks from now, it depends a little bit on our planning. And then the building will be, hopefully, ready until October, November of this year, so extremely fast. It will be a 46,000 square meter building, so very huge facility. And then we will bring in all the equipment, and so we hope to be up and running some when, let's say, after Chinese New Year 20 -- what is it, '19. Then so let's say, March, April next year. The detailed planning is to come. We are doing that as we said. The order intake is very, very high in China. The ongoing demand on the new legislation kicks in now. The Chinese fleets need to build -- need to buy new trailers, standard trailers, but especially for trailers like tankers, silo, et cetera, as they need to run air disc brake and air suspension from 2019, respectively, 2020 on, and so everybody's knocking our door now and would like to have our, especially, air suspensions. And our product range, which we do partly in Europe and partly in North America fits, we believe, very well to that, and therefore, we will grow our business in China significantly. We see something of EUR 100 million plus in 2020, and we believe -- I believe we are on a very good way to achieve that. That is on the trailer side, only truck is to come. Also here, we believe air suspensions will grow, and here we have a very good position with Corpco. And on the bus side, we will see when this will come back. Corpco is not where it should be, but that could help as well. But focus is on trailer very clearly in China. So in North America, that was the other question, the disc brake. Yes, we got some very nice orders from XTRA Lease. We are in discussions with other fleets, with a lot of fleets in North America, also with some very big ones. And you might hear and see in the next couple of months from some very interesting orders, which are in discussions right now. And if this will kick in in the second half of the year, that would be nice, because that will be clearly -- on disc brake, maybe a change in the markets, definitely, from drums to disc. But again, we need to be a little bit patient on that. We are in discussions here. The -- but overall, disc brake is coming both on truck and trailer and on trailer, as I said. Now, it's really kicking in, finally. The 2018 breakdown on costs -- sorry, on our numbers for Q1 and Q2 in Americas, we are working on that, on reducing our corporation cost burdens, as I said in the presentation. I will see -- you will definitely see a better Q1 than Q4. This is very clear, and -- but to talk about the details right now is a little bit too early.

[Christian Ludwig, Analyst]

Maybe just remind us, so it's not going to be a major increase or -- not a major improvement in Q1, will that be fair to say?

[Detlef Borghardt, CEO, President of Region Asia]

That is fair to say.

[Christian Ludwig, Analyst]

And would you say that you believe that by Q3, you would have no additional cost?

[Detlef Borghardt, CEO, President of Region Asia]

Yes. Yes, sorry. In English, it's yes.

[Operator]

Next question comes from Tim Schuldt from equinet Bank.

[Tim Schuldt, Head of Research & Executive Director Research]

Two questions. One, again, sorry, on the margin guidance. You're a lot thinner range this year than last year. And while I would see that actually the negative points are not so strong year-on-year, and yes, therefore, I'm just interested to understand a little better why you are superlatively concentrated on this 1/2 percentage point with your guidance rather than the 1% you had last year. That's the first one. And then secondly, can you give us a little bit more details what you expect with regards to your tax result for Q4 and also for fiscal year 2018?

[Detlef Borghardt, CEO, President of Region Asia]

Okay, yes, Mr. Schuldt. Thanks for your questions. Yes, margin guidance, I would say we are cautious. As I said, this 8% to 8.5%, yes, this gives you a better, let's say, visibility, okay, where we see the year, especially with North America. The results, which we saw especially in November and December last year haven't been really expected, so I'm -- personally, I'm cautious here, so and we said, let's do the range between 8.5% -- 8% and 8.5% and then let's see what will happen during the year. So I believe -- I'm strong belief it is under control now. We know exactly what to do in North America, especially in U.S., of course. But again, I'm a little bit cautious here. If the order intake will increase even further, again, I just said, January was the extremely high months, that I would say will not help in the reorganization of the plants. But okay, we will manage that, but -- therefore, we said let's be on a -- let's be more on the cautious side here. The question on the tax results. The tax rate was lower, depending on -- that will be in the U.S. It will go down, we believe, to 23%, okay, in the U.S., which will give us, I believe, something around EUR 3.5 million. And we will talk about the tax in detail when we present our -- the numbers 2017 on March 16, then you will see the full-blown numbers.

[Operator]

There is next question from Patrick Speck from Montega.

[Patrick Speck, Analyst]

I have one question remaining regarding your -- the adjustments you are doing. From today's point of view, do you see any additional adjustments except for -- or aside from PPAs in 2019 -- maybe in 2018, maybe some burdens from the planned construction in China?

[Detlef Borghardt, CEO, President of Region Asia]

Yes, Mr. Speck. Of course, we always have some restructuring effects. We always did in the last years and of course, next -- this year, you will see something in China. We need to decide what to do with our facilities in Xiamen and in Baotou, but probably they will not so much this year. It was more than next year to come, because, as I said, the new factory will not start production earlier than Q1, Q2 next year. But overall, you should expect much lower restructuring cost than this year. That is very clear.

[Patrick Speck, Analyst]

What would be a fair number to assume, a single-digit number, for example?

[Detlef Borghardt, CEO, President of Region Asia]

Yes, yes, you're right.

[Operator]

And the last question comes from Philippe Lorrain from Berenberg.

[Philippe Lorrain, Analyst]

Philippe Lorrain from Berenberg. A couple of questions from my side, but perhaps we can start just with the M&A, which is the topic we did not really dig into so far. So I just wanted to know how your pipeline for M&A looks like as of today and how does it compare to Q3 2017. So is there any deal we should be aware of, coming perhaps around the corner in the, let's say, coming months? How do you feel about that, basically?

[Detlef Borghardt, CEO, President of Region Asia]

I feel good about it. That's a little bit short. And no, to be serious, we are coming closer, so the pipeline looks much better than in Q3 2017. And if nothing goes wrong, you could expect something quite soon.

[Philippe Lorrain, Analyst]

Okay. And do you have any, I mean -- I would say, with regard to M&A, do you have, let's say, a specific approach when it comes to buying companies that these companies have to, let's say, be in the same margin range like you are? Or are you seeking for just, let's say, some strategic expansion in certain products, certain markets with certain clients, which means you don't really care about the margin profile of the companies you acquire? What's the policy here?

[Detlef Borghardt, CEO, President of Region Asia]

Yes. Very, very easy to answer, very clear to answer. We are -- we have some guidance, internal guidance, for our M&A policies. One is, for example, we definitely will not buy any restructuring cases, okay. This is very clear. Of course, it should be margin accretive, which sometimes is not, let's say -- yes, not at that moment. But if we acquire somebody, then it must be doable within a timeframe of 1 or 2 years to bring a company -- if it is not margin accretive, to bring to a level which we have, okay, at least, or, of course, probably even better. So we take care, okay. So if you just say we don't care, we absolutely take care. And this company should have an aftermarket business which also helps our overall aftermarket. In general, as we said also earlier, and there's no change in the scope on that. Any M&A targets must meet our criteria for our Strategy 2020. It could be in regional adjust -- or let's say, add on. It could be technology for sure, and it doesn't matter if it is truck, trailer or bus. And it could be, yes, in the emerging markets. As you know, we said until 2020, end of 2020, at least 30% of our sales should come from emerging markets, which is today below 10%. All this is unchanged, okay. Let's say, the best case, the target should be margin accretive, should help us regionally, especially in the markets where we'd like to grow and should add some products which fits to our products, which is -- which means under the chassis, absolutely truck, trailer and bus-related. And so overall, you can expect something which fits to almost all this, let's say, points, so you can tick the box here. But again, a little bit too early. Be a little bit patient, okay. And then you could hear something of that. I'm quite convinced that we -- in fact, pleased that we can bring something very positive to the table.

[Philippe Lorrain, Analyst]

Okay. And perhaps just in terms of technology product, what we are speaking about, basically. I mean, your SMART STEEL strategy, does it mean that that's perhaps a target could be also, let's say, more in the software range or that we should expect, basically, M&A to be more concentrated on the hardware side of things? That's basically the question, yes.

[Detlef Borghardt, CEO, President of Region Asia]

It's both. It could be hardware, of course. As we know, we are old -- I always say we are old economy, okay, but still on our end, that was our SMART STEEL initiatives. We exactly fix this point, we need to make our product intelligent with sensor, et cetera, and we need to have a smart algorithm to tell our customers what to do with the datas and, at the end, to make some money with it. And so it could be also in the area of, yes, programming, people who are better in this advice than we are. So it could be both. Could be additional products in our today's product range or very, very close to our product range and/or could be something regarding, yes, new technologies regarding digitalization. But in the second case, it will be then smaller, let's say, things which fit to us and not a big bite. But there are some very interesting, smart startups on the market, with very good ideas, very fast people, and we believe that fits -- could fit very nicely to us.

[Philippe Lorrain, Analyst]

Okay. And could you provide a quick update actually on your SMART STEEL strategies here? Did you start already like selling products involving digital solutions to your clients? I would expect probably more than in North America, if there were stopping point somewhere. Did you start already with these initiatives or is it something that's more in the pipeline for the next couple of years to really hit the market?

[Detlef Borghardt, CEO, President of Region Asia]

It's both. We start already selling products, and I will tell you an example in a minute, but also, there are a lot of things in the pipeline. Definitely, we will -- you will see something, if you like, at the IAA in September, which is this year early September, in Hanover, again, every 2 years. And we just has a first ideas for how our booth will look like, it will be a very big booth this time, and why? Because we will show some very interesting ideas and concepts about digitalization. And yes, you're absolutely invited already now for this, so this is all the things that are in the pipeline, but this is not everything. We also do already in trade visit, for example, we have a product called ELI-te, which is an indicator on the fifth wheel, which shows the driver, with some electronics, some smart intelligence under -- mounted under the fifth wheel, if the fifth wheel is correctly coupled with trailer, with the kingpin, which is a safety-related issue, extremely important to run a truck and trailer combination without, let's say, losing the trailer. And you can imagine this is not a good idea. And so this ELI-te is already -- we started to sell that last year in September, and we already get call, for example, a huge order from a big fleet in U.S. called FedEx Ground, and they're going to rebuild 7,500, I believe, close to 8,000 dollies. A dolly is a combination between a truck and a trailer. And all these dollies have a fifth wheel, and this leads that, due to safety reasons, they rip off all existing fifth wheels on these 7,500 dollies and replace them with our FW35, which is our premium fifth wheel in North America, completed with the ELI-te technology. Very nice order. And again, it will take 2 years to replace all these dollies, but that shows, this is already one thing out of our SMART STEEL initiative, combining some logic, some intelligence with our existing products. So I believe that is a very nice example and a very nice success.

[Philippe Lorrain, Analyst]

Okay. And just perhaps to -- I mean, to come back on the margin outlook. I mean, you were mentioning these EUR 4.5 million positive effects that you had in Q4 in the European region with regard to -- I think it was purchasing. These kind of effects, are they recurring, let's say, on a regular basis in your earnings? Or is it something that was purely exceptional and related to Q4 this year? I mean, because when we look at the outlook that you provide, 8.5% adjusted EBIT margin, and I appreciate that you're quite cautious so far with regard to the margin development, I mean, do we have to take out these EUR 4.5 million to do a proper bridge if we were to compare the adjust EBIT for 2017 and for 2018? Or how do we have to understand actually really these median of tailwinds that you had?

[Detlef Borghardt, CEO, President of Region Asia]

Unfortunately, my answer is yes, you have to take it out. It was a onetime effect. Really not expected by -- from us. But the volume, as I said, in Europe was so high last year. And we -- some of our suppliers, especially the bigger suppliers, we have, yes, some mechanism in the contracts that if we achieve certain volumes or if we overachieve certain volumes, then the suppliers need to give us some rebates. And we always do some fancy numbers in this contract. But if something will work really fantastic, then we might reach this level. And I remember most of the contracts we have signed 2, 3 years ago, and nobody really saw this high numbers coming. So everybody was really surprised, also our suppliers, but contractually, they needed to pay. So -- but this is, again, a onetime effect. This will not happen this year again, because our suppliers are smart people. So I have to give them credit for that. But this will not come again this year. Okay, never say never, but this is highly -- that would be -- I don't see that, okay. This is not part of our planning, so this is not to come again.

[Philippe Lorrain, Analyst]

Okay. So it's right probably to assume that it just inflated the margin in the European region in Q4?

[Detlef Borghardt, CEO, President of Region Asia]

Absolutely right. Yes.

[Philippe Lorrain, Analyst]

Okay. And then just the last question, actually, on your outlook for organic growth, I mean, I was just a little bit surprised by the fact that you're guiding for 4% to 5% organic growth. I would have expected a little bit more, actually, especially because I'm quite bullish on the Asia Pacific and China region. I mean, you've added now, roughly -- I think, it's EUR 12 million incremental sales to APAC/China compared to 2017, due to this new contract that you have won in January. I would have said as well that if we were hearing to what your competitor used to -- was saying with Q2 -- Q3, actually, the Chinese market should not follow the [indiscernible] , be it for the trucks or for the trailers in 2018 compared to 2017 because of the overload ban. We've got as well these regulation change with regard to the transport of hazardous goods. So all these are actually tailwinds probably to volumes and also, specifically, for your own products with regard to air suspensions, air disc brakes and these kind of things. So is it fair to assume that we're going to see a clear double-digit, let's say, organic growth in China? And that if we put that together with, let's say, the strong development feel on the U.S. side of things, even if you were a little bit uppish, all together, the 4% to 5% organic growth that you're getting so far here, is also quite cautious?

[Detlef Borghardt, CEO, President of Region Asia]

Yes. One thing, you have to -- okay, several answers to that. First of all, it's nice -- always nice if the market is growing, if the market is growing in the right direction. In our case, it means talking about premium products, air suspensions, air disc brakes, et cetera. But you need to have the capacity to do that, okay. So therefore, in China, we are running into our facility in Xiamen under, I would say, full steam, okay. So that's the reason why we were building those factories, okay. So therefore, the very big increase, okay, which we will see, will come for us next year, but not this year, because we still don't have the sufficient capacity. We already brought a lot of products in air freights, okay, from U.S. and from here, from Germany, to Chinese -- to our facility in China to meet some demands, but on the long run, this is too costly. Nobody can do it. We don't have these high margin on the OE product. So therefore, we need to build capacity. We need to build the new factory. And then we can harvest all what we are going -- would like to harvest. But for this year, we need to be a little bit cautious here, because we cannot fulfill the demand. So second answer is that we -- the 4% to 5% reflects, let's say, on a much higher basis now when you look to the higher nominal figure in 2018. So the 4% to 5% is already quite a nice increase, as we can see. In terms -- but I said earlier in the presentation, I prefer here to be cautious. We should not, let's say, be too bullish here. It is too early in the year, we are just in February, to see what will happen in the second half of the year. For the first half of the year, especially in Europe, we know pretty well what's coming. In China, you never know, okay. That is always a wild card here. And U.S. also, we will see. So overall, I feel comfortable with this outlook for now, and let's see on the next couple of months how these markets and our development will continue.

[Philippe Lorrain, Analyst]

Okay. So I take that, actually, we should be, probably, still very optimistic with regard to the development in China in the coming years, once you have the capacity in place to meet the demand.

[Detlef Borghardt, CEO, President of Region Asia]

Yes. You got my point 100% right.

[Operator]

There are no further questions.

[Stephan Haas]

If there are no further questions, we would conclude today's conference call. And we'll probably see most of you at the occasion of March 16, when we do the analyst/investors conference in Frankfurt. Looking forward to see you then. If you have any follow-up questions, please free to call in.

[Detlef Borghardt, CEO, President of Region Asia]

Thank you very much. Bye-bye.

[Stephan Haas]

Take care.